According to a Pew Charitable Trusts report, 80% of Americans are in debt. Of these, 44% of them have a mortgage loan, although there are a great number of people with non-mortgage debt too. Around 1 in 3 millennials have home loans, and other types of debt including credit cards, student loans, and personal loans are piling up too, pushing people deeper into the red. The report finds an astonishing 39% Americans with an unpaid credit card balance.
Who is getting into debt?
Debt seems to span all ages, in that many young people are borrowing money in early life but end up carrying that debt into their retirement. Unfortunately, a lot of these people also end up filing for bankruptcy, with the Canterbury Law Group confirming that chapter 7 bankruptcies are on the rise. Naturally, there are many circumstances when it is necessary to take out a loan, perhaps to pay for further education, purchase a car or put towards a mortgage on your home. However, too much bad debt can be bad for your financial health, as well as your personal health as it can quickly get out of control, causing much stress in the process. Here we examine the notion of the Safe Zones and the Danger Zones of your debt.
Understanding Your ‘Safe Zone’ and ‘Danger Zone’
How much is too much debt? Financial experts suggest that aside from your mortgage, your monthly debt repayments shouldn’t come to a total of more than 15-20% of your monthly income. If you are paying more than this, then you are in the ‘Danger Zone’, meaning that you run the risk of falling into a debt trap and that you may struggle to afford the repayments.
A ‘Safe Zone’, on the other hand, is outstanding debt, which you can comfortably pay every month without having to cut your expenses or make major lifestyle modifications because your monthly income is much more than what you are paying to the creditors.
How to Find Your Debt Zone?
Create a list of all your financial obligations and debt.
Add the total amount of money you are making every month, including your partners finances too if appropriate.
Now find out what percentage of your monthly income is going towards paying off the debt. For instance, if your total income is $3,000 every month, you can allocate between $450 (15%) and $600 (20%) every month towards paying off the debt.
1. Increase your monthly debt payment if your current outflow is less than 15% of your income. You can then pay off the debt sooner.
2. Take immediate action to increase your income or reduce the debt payments if it is more than 20%. Bring down your other spending.
Make every effort to keep your debt manageable because it may directly impact your lifestyle, financial health, credit score and credit worthiness. Remember, lenders may not approve your credit requests in the future if youfall behind on your debt payments.